Moody’s changes Laureate’s outlook to negative

New York, May 30, 2014 — Moody’s Investors Service has changed the ratings outlook for Laureate Education, Inc. (“Laureate”) to negative from stable, and has affirmed the company’s B2 Corporate Family Rating (“CFR”), as well as the Caa1 rating on Laureate’s senior unsecure notes. At the same time, Moody’s has lowered the rating of Laureate’s senior secured bank credit facilities, to B2 from B1.

The outlook has been changed to negative to reflect the recent elevation in leverage due to debt-financed acquisitions, along with Moody’s concerns that contributions from these investments will not be sufficient to return credit metrics to levels supportive of a B2 rating over the near term.

The change in ratings outlook reflects Moody’s concerns that Laureate’s leverage, which has increased with rising debt levels associated with acquisitions, will remain elevated over the next 12 months as the company continues to grow. Laureate has a history of using incremental debt to fund investments (acquisitions and capital spending) intended to expand its service offering in the for-profit post-secondary education sector, and Moody’s expects that the company will continue to pursue this strategy going forward. Typically, operating results contributed by acquired entities have been adequate to prevent leverage from exceeding levels expected for the company’s B2 CFR. However, the company’s current pace of investment has resulted in leverage that is now quite high for the B2 rating, and Moody’s believes that the company will be challenged to restore lower leverage over the near term.

In FYE December 31, 2013, the company invested approximately $700 million in acquisitions and CAPEX, which is well above recent historical averages. Taking into account its most recent debt-financed purchase — the pending acquisition of FMU Brazil for approximately $500 million, which is expected to close within the next two months — Laureate’s debt (including Moody’s standard adjustments) now stands at approximately $6 billion, which represents 140% of LTM March 2014 revenue (including acquisitions), and an 80% increase in debt over the past five years. Moody’s estimates pro forma Debt to EBITDA at approximately 6.6 times, which is higher than typical for a B2 rated company. Other credit metrics are similarly weak for the rating. Pro forma EBITA to Interest is estimated at nearly 1 time, while Retained Cash Flow to Debt is below 10%. Although the company has a history of generating earnings from growth investments to stabilize and modestly reduce leverage, Moody’s believes that the company will be challenged to reduce leverage materially over the near term due to the scale of current growth plans and risks inherent in the company’s wide range of operations, internationally. Moreover, because of the company’s global breadth, Laureate’s earnings are subject to substantial foreign exchange exposure.

However, the rating is supported by the company’s prominent market position in the international for-profit, post-secondary education space, solid enrollment growth supported by the breadth of its presence in multiple geographies, favorable industry fundamentals, and expectation for positive GDP growth in most of the countries in which it operates, which should support positive enrollment trends. In addition, because the company operates primarily outside of the US, it does not face the same regulatory pressures relating to Title IV funding that negatively affects many US-based for-profit education providers.

The ratings on Laureate’s senior secured credit facilities were lowered in consideration of the increasing proportion of total liabilities represented by this class of debt. In particular, the company has increased borrowings under its term loan facility over the past few years to fund acquisitions and investments to support growth, as well as to reduce interest expense by replacing expensive junior debt. This implies a lower recovery for these facilities in the event of default per Moody’s Loss Given Default methodology, to levels that no longer support a one-notch uplift over the CFR.

Moody’s assesses Laureate’s liquidity condition as adequate. The company carries substantial cash balances ($427 million as of March 31, 2014), although only $50 million is held in the US. The current US balances reflect seasonal working capital swings, and are expected to increase over the course of the year, approaching levels reported at year-end 2013 (approximately $200 million). Because of high levels of investments, free cash flow is expected to be substantially negative through 2014, as it was in 2013, offsetting substantial cash reserves. Moody’s notes that to some extent the company can rely on the sale of unencumbered assets, such as real estate, as an alternative source of liquidity that mitigates the substantially negative free cash flow. Laureate maintains a $350 million revolving credit facility that expires in 2016. However, with the significant portion of this facility drawn as of March 31, 2014, only approximately $166 million is available to the company as a secondary source of liquidity.

The ratings could be lowered if the company experienced a weakening in enrollments, or if the company cannot successfully implement integration plans under its current growth strategy, precluding the ability to generate increasing earnings that will help towards deleveraging. Specifically, a downgrade could be warranted if Debt to EBITDA remains above 6 times for a prolonged period, EBITA to Interest remains at approximately 1 time, or if liquidity deteriorates.

Ratings could be raised if the company’s earnings and cash generated from operations allow for substantial debt reduction and improvement in liquidity. Credit metrics sustained at the following levels would support higher rating consideration: Debt to EBITDA below 5 times, EBITA to Interest in excess of 2 times, and Retained Cash Flow to Debt of above 12%.

The principal methodology used in this rating was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on http://www.moodys.com for a copy of these methodologies.

Laureate is based in Baltimore, Maryland, and operates a leading international network of accredited campus-based and online universities with 81 institutions in 29 countries, offering academic programs to approximately 850,000 students through over 200 campuses and online delivery. Laureate had revenues of approximately $4 billion for the LTM period ended March 31, 2014.

REGULATORY DISCLOSURES

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